January 7, 2014

Chart of the day, also political rorschach test of the day

From a new paper by the Productivity Commission on why New Zealand industries lag behind Australia, published – you might even say ‘dumped’ – on the Thursday before Christmas. Sent in by a reader (let me emphasise that I was not reading Productivity Commission reports over the summer break).

The paper finds:

. . . the majority of the gap is due to productivity differences in the same industry across the two countries. Across most industries, Australian firms have invested more in capital while New Zealand firms do not use capital and labour as effectively as in Australia.

The chart shows what happened historically. I think. There was terrible allocation of capital under Muldoon – the famous ‘think big’ programs. And then Roger Douglas became Finance Minister and his reforms just annihilated our productivity, a disaster we haven’t really acknowledged let alone recover from. But I’m always interested in alternate explanations . . .

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That graph is as damning an indictment of the effects of Rogernomics as you will ever see. I see that precipitous decline in productivity and wonder “how come the architects of that slump still have any credibility”?

There must be an error in the graph. We all know that property speculation and leveraged company takeovers and flicking public assets iare the most productive activities possible, and NZ post rogernomics is so good at it.

The lack of scale in NZ is a big issue, as is distance from market. These issues have become more and more important over the last 40 years. When we look at policy, we can’t forget that there has been a big push by both parties to increase participation and hours worked – which lowers average productivity. Whether getting GDP growth from people working longer is “appropriate” is an open question IMO.

I’d also note that the comparability of pre-1987 and post-1986 GDP data is a bit questionable given the measurement changes – but if policy makers are willing to compare them, those are the stylized facts we have to work with. Another point is the terms of trade – the productivity change excludes the recent increase in return (and also the relative drop in return between the 1950s-1990s) associated with the terms of trade. If our interest is relative income differences this is a pretty important shift as well. Yes, Australia has seen a big TOT increase (bigger in fact), but that simply means we are comparing ourselves to one of the richest countries on earth🙂

“The graph shows our economy had been in decline since at least 1956.”

It is relative average productivity – productivity has still risen. Furthermore living standards for the median New Zealander, measured by income, have improved significantly since 1956. No need for us to be too negative🙂

ThIs is all converted to NZ Dollars right? So what effect does the exchange rate differences between the US (the benchmark), Aus and NZ$ over the period measured have on those figures? I ask because that big drop in 1984 also coincides with the big devaluation of the NZ dollar. If you make the NZ dollar worth half of what it was, then doesn’t the value produced for the same work also halve?

New Zealand firms do not use capital and labour as effectively as in Australia

NZ firms pay more for capital thanks to Aussie banks and Govt policy that favours property speculation over productive investment.
Kiwis work harder for less pay… that’s cleary not “effective” for NZ GDP either.

It’s not like Aussie just struck it rich by finding tons of gold platinum and uranium lying around?!?

We had Douglas the States had Reagan so please don’t blame Rogernomics, we have followed extremely similar policies.
I don’t think it is a useful comparison, we are largely an agricultural and tourism based economy we don’t have Apple, Microsoft, Oracle, Google and unlike Australia we are too scared to properly exploit our mineral wealth (witness Bathurst in court for 8 years battling Eco loons).
We should compare our GDP per capita changes with Kansas or similar and I would guess a different result would be had. Our Farmers are incredibly efficient and top of the world performers.

“There was terrible allocation of capital under Muldoon – the famous ‘think big’ programs”

Think Big involved borrowing money and investing it in projects that would have the dual effect of reducing New Zealand’s dependence on fossil fuels. In other words, it is quite similar to contemporary Green economic policy.

NB, to point out that winding up with such a bizarrely disfunctionsl economy (famously compared to a Polish shipyard) may have had a lot to do with the a sequence of post-WW2 events is not to argue that everything the Lange govt did was brilliant.

The States had Reagan? You mean a massive blow-out in spending taxpayers’ money on public projects, to keep or create jobs? Because that’s what happened.

Except, of course, the public projects were military, so that “doesn’t count”, eh? Plus, Ronnie was a lovable old sweetie. That’s his real legacy, how to sell bullshit to the faithful. I think Key’s learned a trick or two from old Ronnie.

Think Big involved borrowing money and investing it in projects that would have the dual effect of reducing New Zealand’s dependence on fossil fuels.

Spending $1.84 billion on the Marsden Point Refinery, expanding NZ steel’s Glenbrook plant and putting a third pot line into Tiwai Point reduced NZ’s dependence on fossil fuels how, exactly? Not to mention that the Kapuni ammonia/urea plant, Motunui synthetic fuel plant and Waitara methanol plants were all designed to use a fossil fuel (natural gas) to create other products.

Mmm, you’re right Flashing Light, I oversimplified. Muldoon wasn’t trying to free NZ of dependence of fossil fuels, he was trying to free it of dependence on imported fossil fuels, thus increasing economic self-dependence and insulating the NZ economy from the churn of international capital markets… but that is definitely in line with Green policy.

Actually Flashing_Light, I think he has a point. The Greens are big on import substitution, and fair enough to. There is a strong ecological argument against shipping stuff around the world in fossil fuel burning ships just for the sake of it. Time has proven some of the Think Big projects to at least be arguably good for the economy, apart from the stimulus effect of the actual construction.

Just because thirty years ago the entire New Zealand governing class decided thinking was far to hard and being in charge far to risky for them, so they lost their collective nerve and turned into ideological defeatists wedded to a belief in a form of magic doesn’t mean there is anything wrong with again having parties that actually want to govern. It would at least make a difference from having MPS collecting fat salaries to do nothing except tell us the market will take care of it all anyway,

A great exam question. Two countries adopt the same macro and micro economic reforms – a more open economy, paying back govt debt, floating exchange rates, monetary and fiscal policy, lowering income taxes and increasing consumption taxes, emphasising the benefits of internal competition and reducing regulation. The differences are trivial – differing approaches to the provision of health services, foreign policy/ defence and civic corruption. Do these policies reinforce existing trends or have no impact on the long run trajectories for both economies?

It would be interesting to read the report. Why such a big difference when the Oz were doing their own version of Rogernomics? Maybe a “small country” problem. I wonder what Rogernomics did for us in absolute terms – not compared with two such rich countries.

The same macro and micro reforms? Really? Could you perhaps point me in the direction of Roger Douglases Prices and income accord with the CTU? Keating worked with organised Labour to ensure wages and productivity kept up; here they destroyed it. Trivial? Hardly, unless you are just another apologist for the 1%ers.

@Flashing Light: The Greens’ energy policy is to create a fully renewable energy generation system 2030. If that isn’t a billion dollar industrial enterprise, what is? Granted, they don’t explicitly promise that this will involve government ownership, but I don’t think it’s realistic to expect this will take place without government intervention and control. And I certainly don’t think the Greens are ideologically opposed to the concept of the government assuming management and risk for projects that they believe are a priority.

Yep, there was an agreement between the Australian labour govt and the unions. Labour contemplated it here but did not think the unions could deliver their side of the deal. And while it is a difference I don’t think it is a determining one. No accord would have been able to manage a response to the changes in demand for our key export commodities. And it was this imperative that drove the reforms not an addiction to specific ideas. Various governments had tried a heavily managed top down approach without success.

It’s not just one accord, unions have stayed strong in Australia whereas they were decimated here. Strong unions have led to a higher wage economy and the government has monitored pay and conditions with Fair Work Australia. I’m guessing this centralised labour market control and high wages have some impact on productivity.

The Greens’ energy policy is to create a fully renewable energy generation system 2030. If that isn’t a billion dollar industrial enterprise, what is?

You don’t necessarily need to build more supply to have a “fully renewable energy generation system” (actually, an electricity generation system, which isn’t the same thing at all). Energy conservation is just as important. But in any case, you’re again missing the pretty vital detail of The Greens saying “we propose investing billions of dollars of tax-payer cash into large-scale plant in order to achieve our objectives”. Instead, it looks like they just want to be a bit more like Germany: http://www.iea.org/Textbase/npsum/germany2013SUM.pdf.

Granted, they don’t explicitly promise that this will involve government ownership, but I don’t think it’s realistic to expect this will take place without government intervention and control. And I certainly don’t think the Greens are ideologically opposed to the concept of the government assuming management and risk for projects that they believe are a priority.

None of which leads to the conclusion that “the Greens want to repeat Think Big”. The point being, of course, that you tried a bit of ideological ju-jitsu on Danyl … but it turns out those pesky Greens just don’t say the things that the voices in your head tell you that they do. Which means you have to invent things to accuse them of.

“…Yep, there was an agreement between the Australian labour govt and the unions Labour contemplated it here but did not think the unions could deliver their side of the deal….”

Utter tripe. Re-write history all you like, unlike Michael Gove plenty of people still remember the 1980s and the lies and deceits of Douglas and Prebble and Basset and the rest of those traitorous bastards is as fresh as yesterday. Those slimy pricks were far to arrogant to have sincerely wanted an accord with the unions, and everyone alive then knows it. The fact that the unions failed to fight them on the streets is probably the greatest failure of democracy in our history, but that is another discussion.

Keating moved away from centralised wage fixing to supporting enterprise bargaining. Note that he did not destroy the power of workers to negotiate wages – he simply reformed it. If you don’t think that Australia’s stellar economic success of the last thirty years does not owe a huge amount to it being the only Anglosphere country to not deliberately set out to destroy the purchasing power of it’s own working and middle classes, then you are a complete and unreformable idiot.

Secondly, Keating didn’t set out to punish the most vulnerable by driving them into abject poverty like Ruth Richardson did. In fact, Hawke and Keating presided over a considerable expansion of the largesse of the Australian welfare state. They improved affordability of and access to key services such as health and child-care, and made large increases in payments to low wage and jobless families with kids – imagine the tut-tutting, predictions of moral disaster and general outrage from the spiteful and pettily vengeful neo-Victorian authoritarians here if the government were to do that! They expanded the coverage of compulsory super and all in all they generally substantially improved the spending power of the lowest 20% of Australian households.

Keating understood the way out of a recession is not to destroy the purchasing power of the middle class, and building a proper first world, inclusive social democratic society means you can’t give up on and consign the bottom 20% of your society to a hopeless future in an invisible, parallel third world state which everyone who is lucky enough to not be in then frantically pretends doesn’t exist.

in short, saying NZ and Australia persued the “same policies” is utter twaddle peddled by ideological apologists for our economic failure. Hawke and Keating recognised the legitimacy of the voice of workers and sought to take everyone along with them, and to ensure – uniquely in the english speaking world – they maintained and raised the living standards of their people. Our governments, in contrast. simply gave up running the country and handed it over to shysters, snake oil merchants to administer it via a once vauntedand now discredited ideology. Our leaders sneered at organised labour and refused to recognise the legitimate claim of all of us to having a say in our the country is run. Australia leaders in the 1980s took the hard path of working together to make a social deomcracy; Our leaders were cowards who took the easy path of giving up trying, and heading towards an authoritarian third world sham democracy.

Your comprehensive theory of everything would be more impressive and have a bit more explanatory power if the level of union penetration of the private sector in Oz was higher than 14 per cent. I suspect the accord was more effective as a Labour Party cohesion strategy than as an economic strategy.

I’m not saying they want to exactly replicate Think Big, I’m saying that the things that Think Big is usually criticised for – borrowing heavily to fund a major investment in energy generation – are Green party policy. The Greens would of course not invest in fossil fuels, as you correctly pointed out, but from a financial point of view, it’s broadly the same.

Comparisons to Germany aside, do you really think NZ can reach fully renewable without major investment in generation capacity? Because that seems like a pretty big call. I know conservation is projected to play an important role, but I doubt we can get there by conservation alone.

The majority of New Zealand industries have a lower level of labour productivity
compared with the same industries in Australia. This is particularly the case in mining,
agriculture, most branches of manufacturing, construction, retail and wholesale trade and
financial and insurance services. However, New Zealand has areas of relatively strong
performance in food and drink manufacturing, utilities (electricity, gas, water & waste
services) and arts and recreation services.

In some service areas such as professional, scientific & technical services and information
media & telecommunications, it is hard to identify the productivity leader with any
precision due to sensitivity to the choice of ‘purchasing power parity’ exchange rate and
other measurement issues. However, there are at least some signs of New Zealand
comparing well in these industries.

so it’s a bit of a mixed bag. (In terms of overall economic health some of it doesn’t make sense – we’re a much more efficient agricultural producer and Australian manufacturing includes their car industry which has been an economic disaster).

But assuming for a moment that the differences in the two economies are due mainly to differences in capital investment then the question then is why was there a different pattern?

Did Australia just have greater access to investment funds because of mining profits?

p7 of the report has the direct comparison between Australia and NZ, without the complicating comparison to the US. What it seems to show is a) a continuous downward trend for NZ since 1956, probably initially for the reasons various people have alluded to above about changes in the world economy, but for other reasons at other times since then; b) a flattening of the rate of decline since about 1989; c) generally relatively small and fast variations around trend before about 1966 and after about 1989, but large, slow swings in between those periods, particularly those two increases (1970-73, and 1979-83, so far as my eyeball can distinguish), followed by precipitous declines (1974-78, and 1984-87).

The two big boom-bust cycles 1970-78 and 1979-87 look pretty similar to me, even though they happened under very different policy settings, and there is a pretty consistent long term trend overall. So maybe NZ governments pulling levers on economic policy settings are only a small part of the explanation for these patterns…

I’m saying that the things that Think Big is usually criticised for – borrowing heavily to fund a major investment in energy generation – are Green party policy.

Right. The policy of the imaginary Green Party that you need to invent because the actual, real world Green Party doesn’t actually say it. Just like the “National Party” has a policy of selling off every state owned asset and reintroducing slavery. I read all about it on The Standard.

“Yep, Rogernomics started that long term decline starting in 1966. Nothing to do with wool bales getting superceded by artificial fibres, the Nixon Shock or Australia’s open cast mining boom.” – Will de Cleene

Funny how the Rogernomics, neo-liberal “reforms” hastened that decline instead of reversing it.

Why do you think that was, Will? Let me guess, it was the fault of [insert left-wing demogogue here].

Yes it is mixed bag but i’ts interesting u highlight capital investment because I think the main difference is that we’re a small business nation. Vast majority of our businesses are small n are private as in nt on share market. So apart from going to a bank, accessing capital wud be difficult for them. They are also poorly managed(according to a report from MED). I say a lot of the factors are at a microecon level.

No idea. I’m not an electricity supply expert. Nor do I have anything to do with Green Party energy policy (or any other kind of policy).

That said, the Green Party does have a fairly lengthy energy policy that purports to explain how it will deliver on its 100% renewable sources by 2030 goal. Which, interestingly enough, doesn’t mention multi-billion dollar state investment in things like wind farms and dams. But don’t let that small detail stop you from claiming that this is what they propose … just like Think Big!!!!

They may not specifically say that they intend to build generating capacity, but I just can’t see how they can achieve their stated goal without doing so. So, making the assumption that they are serious about their goal, I can only presume that they’re going to do that.

I know it doesn’t explicitly say so on their policy website, but I don’t think that making inferences from party’s declared goals is such a reprehensible practice. And going from “the Greens want fully renewable energy, soon” to “the Greens want to build more renewable generation capacity” doesn’t seem so incredible to me, frankly.

Just to show what I’m talking about, according to the Wind Energy Assocation, reaching the government’s goal of 90% renewable by 2025 – which seems compatible with the Greens’ goal of 100% renewable* by 2030 – “will require a big expansion of renewable electricity generation”.

So my inference is consistent with those actually working in the renewable energy industry. Which only further encourages me to think you’re wrong in saying it’s something I dreamt up.

Which only further encourages me to think you’re wrong in saying it’s something I dreamt up.

Except you haven’t just “dreamt up” that there’ll have to be “a big expansion of renewable electricity generation” to meet the Green’s policy goals. You’ve also dreamt up that this inevitably must take the form of massive Government investment in large-scale generation plant and equipment (like the Clyde Dam … it’s “Think Big” all over again!). All without any actual evidence (aside from “inferences“, of course!) that this is what the Greens propose.

Which is fine. You can make any claims you want. Just like people on the Standard can claim that National intends to privatise Kiwibank, the roads, the hospitals, the air, etc, etc, because it can be “inferred” from their current policies that this is what they really mean to do. You’re just as credible as they are.

“You’ve also dreamt up that this inevitably must take the form of massive Government investment in large-scale generation plant and equipment (like the Clyde Dam … it’s “Think Big” all over again!).”

Well, I can’t really see how else a major increase in generation capacity can be achieved in such a relatively short term. Maybe it will involve government investment in multiple small scale farms rather than one or two big ones, but financially, that doesn’t really make much difference. Think Big would have been a financial failure if it’d taken that form.

Australians are more skilled on average than New Zealanders and this explains why our productivity has fallen over the course of 55 years, while theirs has risen. Cronyism in the workplace has been an issue in both countries, this is a result of the shared “she’ll be right, mate” and “come on, have a beer” attitudes but, maybe not the entire 55 year timeframe, but definitely the last 25 years, Australia has not encountered recessionary periods, enabling firm to reinvest their profits in the firm and to focus on skilled labour markedly. New Zealand has yet to take advantage of its mineral wealth and to tackle its drinking culture. But, in general, like Australia, we have a system of Government that throws out lollies whenever it can to garner votes, and in global western terms we have average working entitlements except for annual holidays which are amongst the generous in the world. We have also only recently tackled the issue regarding sick pay, so employers can now ask for a Medical Certificate after one day of absence instead of three days in a row. Cutting paid tea breaks won’t help increase our productivity, despite what some National politicians may tell you. We have one of the highest consumption rates of marijuana in the world, so now is not a good time to relax cannabis laws but rather tighten up on them as is being done in some larger firms with the recent introduction of monthly random drug and alcohol testing. Now is also perhaps not a good time to increase paid maternity leave, even though our legislation regarding this is crap compared to most other western countries.